Lagarde sees deal in the making on IMF funding

Thu Apr 19, 2012 2:47pm EDT
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By Lesley Wroughton and Stella Dawson

WASHINGTON (Reuters) - International Monetary Fund chief Christine Lagarde said on Thursday she expects to win a big boost in funding to help the lender contain damage from the euro-zone debt crisis now that Europe has taken significant steps on its own.

Calling the euro zone the "epicenter of potential risk" for a world economic recovery that is "timid and fragile," Lagarde also urged European Union policymakers to directly inject some bailout funds into their troubled banks.

"We expect our firepower to be significantly increased as an outcome of this meeting," she said at a news conference to kick off the spring meetings of the IMF and World Bank.

The IMF wants to secure at least $400 billion in new funding, which would double its firepower to deal with the euro zone debt crisis and any spillover to other countries. The IMF firewall would complement the $1 trillion in emergency funds for Europe agreed upon by the EU leaders last month.

A larger IMF war chest to safeguard countries could help ease concerns in financial markets over the risks of global contagion. Investors are growing increasingly worried that Italy and Spain will fail to ratchet down their budget deficits as their economies shrink, forcing them to join Greece, Ireland and Portugal as bailout recipients, a prospect that weighed on global stocks on Thursday.

Concerns also are mounting about the resiliency of the European banking system. The IMF estimates its banks must shrink assets by $2.6 trillion over the next two years to meet higher capital standards and cover bad loans, causing credit to contract in an already weak economy.

Spain's banks are particularly vulnerable, hit by a plunging property market and the falling value of Spanish government debt. An auction on Thursday highlighted nervousness over Madrid's finances. Although bidding was solid, the government paid an uncomfortable 5.74 percent on its new 10-year bond.

Lagarde said the EU should use its bailout funds to inject capital directly into euro-zone banks, which would lessen the risk piled onto government balance sheets, and she called for the EU to supervise national banks.   Continued...

IMF Managing Director Christine Lagarde listens to a question at a news conference at the Spring Meetings 2012 of the IMF and World Bank Group in Washington, April 19, 2012. REUTERS/Larry Downing